So how does an FHA loan work
Unless you won the lottery, or have a trust, odds are – you’ll need a mortgage when you buy your next property, but how do you find the best option? FHA loans are one of the more commonly available options. FHA stands for Federal Housing Administration, and they provide a very reliable home loan program. Be sure to keep FHA in mind as it can provide an excellent program if you don’t already have an FHA home loan.
So how does an FHA loan work? The FHA itself does not actually write the home loans. If you want to obtain an FHA mortgage, you will still be working with a traditional loan originator. You can get them from banks or mortgage loan companies.
FHA insures the home loan in the event of borrower failed to pay – which means that if the bank forecloses, FHA steps in and covers the mortgage. FHA loans have Private Mortgage loan Insurance built into the mortgage loan – meaning if you have less than 20% equity in the residence, you have to pay for that insurance. This insurance protects the mortgage broker from losing more than what is owed on the house in the event of foreclosure. Be careful – the leading drawback to an FHA mortgage is that the PMI insurance is obligated, and built into the mortgage loan – resulting in slightly higher payments. When banks do not make you buy private mortgage loan insurance, they are taking on all of the risks of default.
With an FHA home loan, the FHA is taking on all of the risks. If you default on the loan, the FHA will pay the bank the amount remaining on the mortgage loan. This takes the burden off of the banks and puts it elsewhere. Therefore, the banks are now willing to make more home loans to people that they would not normally mortgage loan to. Therefore, you might be able to qualify for an FHA mortgage loan even if you have failed to meet the requirements for other programs.
One big bonus about the FHA program is that you are only obligated to put as little as 3% down. Because such a low down payment is obligated, the FHA program allows for a lot more buyers to buy a residence that would otherwise be able to do. Most traditional mortgages require a lot more as a down payment – reducing the number of buyers who can buy a house. These days, that can be quite a problem.
FHA home loans are also offered with no prepayment penalty. Some mortgages are sticking it to buyers when they try to pay off the mortgage loan early. If you sell or refinance your mortgage loan, you won’t have to worry about that with an FHA home loan.